One of the best things about exchange-traded funds (ETFs) is that they can help investors diversify their portfolios. Since ETFs are made up of a basket of stocks, they can help lower volatility, thus smoothing investment returns over time.

Today, let's examine a sector-based ETF that has great potential for the long term: The Global X Cybersecurity ETF (BUG 0.83%).

Image source: Getty Images.

What is the Global X Cybersecurity ETF?

The Global X Cybersecurity ETF is an exchange-traded fund focusing on cybersecurity stocks. The fund is administered by Global X, a subsidiary of the Mirae Asset Financial Group, a financial services company based in South Korea.

The Global X Cybersecurity ETF was started in 2019 and has holdings in cybersecurity stocks from the U.S. and abroad. Roughly 67% of its holdings are from American companies, 16% are based in Israel, 12% are in Japan, and 4% are in South Korea.

Top holdings include CrowdStrike Holdings (7.5% of total holdings), Fortinet (7%), Check Point Software Technologies (6.4%), Zscaler (5.9%), CyberArk Software (5.6%), and Palo Alto Networks (5.5%).

Given that the majority of the fund's holdings are growth stocks, it should come as no surprise that the fund doesn't pay a significant dividend. As of this writing, its dividend yield is a tiny 0.1%.

As for fees, the fund has an expense ratio of 0.50%. That means someone who invests $10,000 in the fund will pay $50/year in fees. While this expense ratio is around the average rate across all ETFs, it is significantly above the rate charged by some of the world's most popular index-tracking ETFs, like the Vanguard 500 Index Fund ETF, which charges only 0.03% in fees.

What makes the Global X Cybersecurity ETF special

The appeal of the Global X Cybersecurity ETF comes from the cybersecurity industry.

In a nutshell, cybersecurity has quickly grown into a must-have asset for almost every organization around the world. Unfortunately, that's because cybercrime is not only on the rise -- it's skyrocketing.

According to data compiled by Statista and the Federal Bureau of Investigations (FBI), worldwide reported losses due to cybercrime increased from $3.5 billion in 2019 to $12.5 billion in 2023. In addition, the number of complaints rose from more than 467,000 to over 880,000 during the same period.

Image source: Statista.

What's more, these are only the reported incidents. Some analysis suggest that up to 85% of cyber incidents go unreported.

It all amounts to a troubling reality: As the world's organizations have come to rely on digital systems and data, they've become extremely vulnerable -- and it's very costly.

As a result, cybersecurity budgets are growing, too. That means companies like CrowdStrike, Zscaler, and Palo Alto Networks all have the wind at their back.

Is Global X Cybersecurity ETF a buy now?

For investors who are looking to participate in the secular trend of the rise of cybersecurity but don't want to commit to a single company within the space, this fund offers a practical solution.

By spreading their risk throughout the entire industry, investors can hope to smooth out some of the volatility that comes from owning a single stock.

For example, CrowdStrike has been a great stock to own over the long term; it's advanced more than 500% over the last five years. However, it's also experienced massive drawdowns over that same period, including a drop of more than 67% in 2023 and another drop of nearly 50% last year.

The Global X Cybersecurity fund, on the other hand, is less volatile, although it has faced two drawdowns of more than 25%.

To sum it up, investors may want to consider this fund as an alternative to individual stocks within the cybersecurity sector, which can prove volatile.